IMPACT OF THE RISING PRICES OF OIL-BASED FUELS ON THE SAMOAN ECONOMY

HIGH LEVEL REGIONAL POLICY DIALOGUE ON THE FOOD-FUEL CRISIS AND CLIMATE CHANGE 9-10 DECEMBER 2008

BASIC INFORMATION ON SAMOA (contd)

Gross Domestic Product (2006): SAT$1,248.7 million; US$455.7 million. GDP composition (2006): primary sector 11.4%; secondary sector 26.6%; tertiary sector 62.1%. GDP per capita (2006): SAT$6,969; US$2,543. Remittances (19902005 average): about 20% of GDP. Human Development Index (2004): 0.778, placing Samoa 75th out of 177 countries, in the medium human development group.
Source: Strategy for the Development of Samoa 2008/2012

UNDERSTANDING THE IMPACT OF RISE IN OIL PRICES ON SAMOAN ECONOMY

1. Main Causes of Oil Price Rise; 2. Price Determination of Petroleum Products Prices; 3. Macroeconomic Effects (Balance of Payments and Inflation) 4. Sectoral Impacts (Transport, Electricity, Commercial and Households)

1. MAIN CAUSES OF OIL PRICE RISE

High Demand of oil from Emerging Markets and Developing Economies; Limited Supply Response;

Sources: Government of Samoa Press Releases, IMF Reports, etc

2. PRICE DETERMINATION OF OIL BASED FUELS

a) Government sets prices; 1. Singapore Exit Price 2. Supplier Shipment Costs; Transportation Costs; and, Profit Margin (fixed); 3. Distributor Domestic Transportation Costs; Excise tax; VAGST; Petroleum Levy (Loan Repayments, etc) Terminal Fee (maintenance, insurance, etc) Profit Margin (fixed); 4. Retailers/Petrol Stations Profit Margin (fixed); b) Suppliers Price sets in Contract; c) Distributors (Wholesale) Price sets in Price Order; d) Petroleum Stations set in Price Order;

SINGAPORE PRICES OF CRUDE OIL AND OIL-BASED FUELS

Figure 1: Singapore Prices of Crude Oil and Oil-Based Fuels
More than 3 times higher than 2003 Prices
90.00 Average Annual Price (US cents per litre) 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2003 2004 2005 2006 2007 2008 (Jan.June)
Crude Oil Diesel Petrol Kerosene

Source: http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm

LANDED PRICES OF OIL-BASED FUELS

Figure 2: Landed Prices of Oil-Based Fuels
1.20 1.00 0.80 0.60

1.09
Dec-04 Jul-08

1.09 0.91

US$ per litre

0.40
0.40 0.20 0.00 Diesel

0.37

0.42

Petrol

Kerosene

Source: Ministry of Finance

WHOLESALE PRICES OF OIL-BASED FUELS

Figure 3: Wholesale Prices of Oil-Based Fuels
4.50 4.00 3.50 3.00 SAT$ 2.50 2.00 1.50 1.00 0.50 0.00 Diesel
Source: Ministry of Finance

3.84 Dec-04 Jul-08 3.34

3.65

1.81

1.77

1.73

Petrol

Kerosene

RETAIL PRICES OF OIL-BASED FUELS

Figure 4: Monthly Petroleum Prices Per Litre January 2003 - July 2008
330.00 320.00 310.00 300.00 290.00 280.00 270.00 260.00 250.00 240.00 230.00 220.00 210.00 200.00 190.00 180.00 170.00 160.00 150.00 140.00 130.00 120.00 110.00 100.00 Jan-03 Apr-03 Jul-03 Oct-03

As expected, retail monthly prices have risen

Prices (sene)

Unleaded Petroleum Diesel Dual Purpose Kerosene (domestic)

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Monthly Prices

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Source: Ministry of Finance

CHANGES IN RETAIL PRICES FROM JANUARY 2003 TO JULY 2008

Periods Price of Unleaded Petrol Price of Diesel Price of Dual Purpose Kerosene (domestic) 1.32 3.75 15.8 183.4

January 2003 (SAT$ per litre)

1.42

1.41 3.93 14.8 178.5

July 2008 (SAT$ 3.43 per litre) Annualised Growth (%) Percentage Increase on 2003 Level
Source: Ministry of Finance

12.1 142.3

ANNUAL SALES VOLUMES OF PETROLEUM PRODUCTS 2004 - 2007

Figure 5: Annual Sales Volumes of Petroleum Products
40,000,000 35,000,000 30,000,000 25,000,000 Diesel Petrol Kerosene

L itr e s

20,000,000 15,000,000 10,000,000 5,000,000 0 2004 2005 2006 2007

Petroleum Volumes have been relatively stable

Source: Ministry of Finance

WORLD, REGION AND NATIONAL DEMAND VOLUMES - CONTEXTUALISATION

1. World Demand 82,000,000 barrels a day;

2. Regional Demand - 40,000 barrels a day i.e. 5 out of 10,000 of World Demand; 3. Samoas Demand - 1,400 barrels a day i.e.4.0 percent of Regional Demand;

Source: Pacific Islands Forum Secretariat Presentation in Auckland

3. MACROECONOMIC EFFECTS (BALANCE OF PAYMENTS)

Dramatic Oil Price Rise
Actual Petroleum Imports for Financial Year 2007/08 - SAT$182.4 million; Petroleum Imports (USD exchange rate unchanged) - SAT$161.9 million;

Extra-Payment Amount: SAT$20.50 million

Comparisons 1.44% of GDP (2007); 9.9% of Gross Foreign Exchange Reserves (June 2007);
In effect reduced import cover from 4.0 months to 3.6 months;

Source: Central Bank Bulletins and Ministry of Finance

3. MACROECONOMIC EFFECTS (BALANCE OF PAYMENTS)

Cushioned by 7.7% appreciation in Samoan Tala over US Dollar (December 2004 July 2008); Excise Tax on Unleaded Petrol Reduction from 40% to 18% of Landed Petroleum; Excise Tax on Diesel Reduction of 36% to 14% of Landed Diesel; Low Pre-tax wholesale margin Petroleum facility ownership and competitive tendering;
Source: Central Bank Bulletins and Ministry of Finance

3. MACROECONOMIC EFFECTS (BALANCE OF PAYMENTS)

Figure 7: Petroleum Imports' Shares of Total Imports and GDP
Share to Total Imports nearly doubled in value; Share to GDP increased by 2.93% within the four years

S ha re of Tota l Im ports (% )

25 20 15 10 5 0 Share of Total Imports Share of GDP

2003 12.83 6.00

2004 17.66 7.43

2005 18.71 8.52

2.93%

2006 18.84 9.16

2007 20.64 8.93

7.81%

Source: CBS Bulletins and Ministry of Finance

S ha re of G D P (% )

Share of Total Imports Share of GDP

10 9 8 7 6 5 4 3 2 1 0

3. MACROECONOMIC EFFECTS (INFLATION)

Consumer Price Index (CPI) Direct Impact of Petroleum Products on CPI i.e. 1% rise in fuel imports would directly lead to a 0.04% rise in CPI or 25% in fuel imports would directly lead to a 1% rise in CPI;

(This understates the inflationary effect as fuel is an intermediate input into other goods and services)

4. SECTORAL IMPACTS (TRANSPORT, ELECTRICITY AND HOUSEHOLDS)

Source: Ministry of Finance

4. SECTORAL IMPACTS (TRANSPORT)

Land, Sea and Air Petroleum Products Imports - SAT$137.50 million; SAT$15.46 million (overspending);

4. SECTORAL IMPACTS (TRANSPORT)

Unleaded Petrol (ULP) Dual Purpose Kerosene (domestic)

Period: July 2007 - July 2008

Diesel

Percentage Changes

33.2%

59.7%

63.7%

July 2007 Prices

100.00

100.00

100.00

July 2008 Prices

133.22

159.71

163.65

4. SECTORAL IMPACTS (ELECTRICITY)

Petroleum Products Imports - SAT$14.95 million; SAT$1.68 million (overpayment); Cost of Fuel 77% of Total Operating Costs; 53% of EPC Overall Costs; June 2006 July 2008 Import Price of Diesel (excluding Govt charges) increased from SAT$1.66 to SAT$2.80 per litre; 73.5% Diesel Price Increase; 56.6% of EPC Overall Costs;
Source: ADB 2007, Samoa Private Sector Assessment: Consolidating Reform for Faster Growth: ADB

4. SECTORAL IMPACTS
Commercial Petroleum Product Imports - SAT$23.91 million; SAT$2.69 million (overpayment); Households Petroleum Products Imports - SAT$5.98 million; SAT$0.67 million (overpayment);

POLICY OPTIONS FOR RESPONSE

Reformed and competitive environment for fuel imports and distribution
small difference between Singapore prices for oil-based fuels and the pre-tax wholesale fuel price; continued adherence to an automatic pricing mechanism consistent with Governments general economic policy; maintain commitment in a supply-side shock that is completely beyond its control;

POLICY OPTIONS FOR RESPONSE

- Imposed substantial fiscal costs and are inefficient; - Loss of revenue may require cuts in government expenditure in areas such as education and health;

POLICY OPTIONS FOR RESPONSE

Controlling public transport prices
squeezes service providers cost-price and discourages investment; Targeted cash transfer or voucher programs offer a first-best solution; allow for a partial indexation of retail prices to the price of imported fuel;

POLICY OPTIONS FOR RESPONSE

Monetary policy kept tight to protect the economy from second-round effects:
rise in imported fuel prices and ease pressure on foreign exchange reserves; possible adverse effects of higher interest rates on private investment. tightened monetary policy stance maintained; the expansionary fiscal policy adopted in FY2009/10;

POLICY OPTIONS FOR RESPONSE

Tala Appreciation against the US dollar by close to 8% between December 2004 and July 2008 Samoas exchange rate policy has been a credible anchor; a policy commitment to maintaining this stability in the nominal effective exchange rate;

POLICY OPTIONS FOR RESPONSE

Medium- to Long-term Policy Option: Reducing the Reliance on Imported Fossil Fuels; Use of Coconut Oil in Diesel Generators; Allowing the domestic price of fossil fuels to rise;

POLICY OPTIONS FOR RESPONSE

Preferred Policy Response allow the price mechanism to work with minimal interference, so that the energy policy target of shifting to renewable energy sources is supported;

FAAFETAI TELE LAVA